American Express Credit Card Rewards May Soon Get Worse

21. March 2018.

Photo by Ulrich Baumgarten via Getty Images

American Express is making major changes to a big portion of its business, and cardholders may end up feeling the consequences depending on how things shake out. Stephen Squeri, American Express’s new CEO, announced the company plans to reduce fees that it charges merchants anytime they accept an AmEx card. The plan, put simply, is that lower fees may attract more businesses to start accepting American Express cards. However, the cardmember rewards—the points and cash back that cardholders collect—are fueled by the revenue generated by merchant fees. If AmEx’s plan doesn’t lead to higher fee revenue, its cards may soon become a lot less rewarding.

The History and the New Way Forward

Historically, American Express charged merchants high fees that helped to fund premium perks and establish an air of exclusivity around its brand. Many of its cards are targeted at affluent businessmen and businesswomen. One analysis shows American Express makes roughly $60 per year, per account, in interchange fees. That’s more than double what banks like Chase or Discover make. Other issuers derive more of their revenue from interest charges.

AmEx’s strategy came at a cost. Because AmEx was making more money with each swipe of its cards, fewer merchants were willing to accept cards donning the blue centurion logo. Currently, Visa and Mastercard are accepted at 1.3 million more merchants, chiefly because they are more affordable.

Squeri now plans to cut these fees by five to six basis points—the largest decline in price since 1998. The new CEO hopes the move will entice more merchants to welcome their cards with open arms.

More recently, American Express has also come under legal scrutiny over its fees. The U.S. Supreme Court will determine whether AmEx’s merchant fees are in violation of U.S. antitrust laws. Currently, American Express forbids merchants that accept AmEx from steering customers to use low-fee alternatives. It’s unclear whether the new changes to its fee policy are a response to these legal hurdles.

The Potential Impact to Cardholders

If AmEx’s plan to increase its merchant network goes as planned, the fee revenue will increase and things will play out as they would otherwise, as far as cardholders are concerned. However, if more merchants don’t come on board and revenues dip, credit card rewards are likely to take a hit. With merchant fee revenue down, reward spending would become a much larger chunk of overall revenue. This may force AmEx’s hand to cut some of its perks.

The company’s merchant fee revenue has grown substantially over the years. This has allowed AmEx to steadily increase the funds it can dedicate to cardmember rewards and benefits. The bank has steadily rolled out premium perks that defined the luxury brand, especially on flagship products like the Platinum Card. AmEx has launched new cardmember-only airport lounges, provided Uber credit, and even bought out Citigroup Inc.’s Hilton credit card business, increasing its total co-branded portfolio.

AmEx spending on cardmember rewards.

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